National Australia Bank’s (ASX: NAB) fiscal 2025 profit was stable at $7.1 billion. Lending and deposit growth, and higher net interest margins, were offset by higher loan impairments and operating expenses, including wage inflation, higher technology spending, and more financial crime-related costs.

Why it matters: Profit missed our forecast by 3%, mostly due to softer revenue growth. We have lowered short-term forecasts modestly on slightly softer noninterest income and higher expenses to support growth, but momentum in the business is solid.

  • Loan growth accelerated to an annualized rate of 6.5% in the second half, and net interest margin expanded 8 basis points on the first half to 1.78%. Earnings from the larger loan book should flow into fiscal 2026. Our assumption of 4.5% annual loan growth to fiscal 2030 assumes 2%-3% GDP growth.
  • As the cash rate fell, banks reduced the discounting of new loans and became less generous with deposit rates, helping prevent lower margins. While National Australia Bank’s 11.4% ROE is reasonable, competition is not intensifying, as we think smaller banks’ returns are below their cost of equity.

The bottom line: We increase our fair value estimate 3% to $33 for wide-moat National Australia Bank on the time value of money. Shares are materially overvalued. A forward P/E of 18 times and dividend yield of 4% are rich given our expectation for 5% average EPS growth per year to fiscal 2030.

Between the lines: Despite it being a target area of competitors, NAB modestly added to its market-leading share of business lending, now 22%. Built on strong customer relationships, ongoing investment in specialist lenders, and digital capability are reinforcing its position.

  • A final fully franked dividend of $0.85 is flat on the first half, and on a similar 73% payout ratio to last year. We expect the payout ratio to average around 70% over the next five years, with surplus capital absorbed by loan growth.

National Australia Bank’s profitability remains robust as it defends business-lending market share

National Australia Bank is one of four major banks operating in oligopolistic Australia and New Zealand markets. It is Australia’s biggest business bank, offering a full range of banking and financial services to the consumer, small business, and corporate sectors, with significant operations in New Zealand.

The bank has consistently held onto its large share of business loans, and continued investment shows a clear intention to retain this position. The banks greater investment into specialist credit teams across areas such as agriculture, health, education, franchising, as well as business banking centers, sets the bank apart. This ultimately gives the bank a better understanding of the customers’ requirements, faster turnaround times, and higher approval rates. Capacity to make investments into digital onboarding and fast access to unsecured lending ensure the bank retains high satisfaction amongst small business customers.

In home lending, lifting lending volumes to customers directly (not via brokers) is a focus for the bank, being tackled by investing in technology to improve efficiency and customer experience, and by also adding more bankers.

The main current influences on earnings growth are modest credit growth, improving margins as the banks adjust lending and deposit prices for changes in the cash rate, and investments in digital offerings. Operating expenses will continue to rise as the bank invests to capture growth opportunities, this despite productivity improvements being realized.

We expect a return to midcycle levels around 0.20% in fiscal 2028. High levels of bad debt provisions expected to help buffer the earnings impact of rising impairments in the short term, and could even be a positive for earnings if released.

Bulls say

  • Management focus is on the successful, lower-risk, and profitable domestic banking. Economies of scale, pricing power, a strong balance sheet, and high credit ratings provide a robust platform to drive growth.
  • As Australia’s biggest business bank, National Australia Bank has the most to gain from strong demand for business credit.
  • NAB has the ability to achieve cost savings and drive operational efficiency improvements.

Bears say

  • A slowdown in core earnings growth could come from slower business loan growth, margin compression, falling fee income, and a worse-than-expected loan loss outcome.
  • If stress returns to global credit markets wholesale funding costs could increase materially.
  • Regulatory, compliance, remediation, and customer refund risk are difficult to predict.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.